John Carney Doesn't Understand Austrian Business Cycle Theory
The MMTers would say that the Austrian view of fractional reserve banking is not really applicable in this day and age. The activity that Murray Rothbard described as “making loans out of thin air” and regarded as a form of counterfeiting is actually much more pervasive than he understood.
In the modern day and age, banks lend without regard to their reserves. The loan officer never calls the Federal Reserve to check whether reserves are adequate. Instead, banks make loans just the way other businesses invest in long-term projects—with an eye to profit. That is, banks lend according to their view of the likelihood of making a profit based on the risk factors of borrowers and the risk-premium the bank can charge them. Those new bank loans create new deposits in the banking system.
Of course, bank loans do need to be financed in some way, because of the reserve requirements that banks must meet every other Wednesday. But a bank doesn’t need a depositor to drop by on Tuesday afternoon with a check or a new investor to arrive with a briefcase full of new capital. They can meet the reserve requirement by borrowing on the Fed Funds market. And there are always enough reserves to borrow because the bank created additional reserves by making the loan in the first place. In a pinch, they can borrow from the discount window of the Federal Reserve.
“Okay! Enough already! I get it,” the Austrian might reply. “Our banking system is even crazier than I imagined. What’s your point?”
The point is that interest rates no longer reflect savings rates. The interest rate signal is broken by the operations of the modern monetary system. Increases in savings don’t show up as falling interest rates, and decreases don’t show up as rising interest rates.
Carney is right that on many bank accounts these days, formal reserve requirements
don't exist. What he is wrong about is its relevance for ABCT. Though reserve requirements have often been mentioned in some texts about ABCT, they are in no way something that ABCT logically presupposes. Reserve requirements or not, the Fed nevertheless controls interest rates, particularly at the short end of the maturity market.
And while it is true that interest rates in the modern monetary system don't reflect the natural savings rate, that fact doesn't contradict ABCT. Quite to the contrary, the whole point of ABCT is that business cycles are created by the Fed-controlled monetary system pushing down interest rates below its natural level.